Principles of Marketing

CHAPTER 11 | Pricing Strategies: Additional Considerations 339
regular shoppers at home goods retailer Bed Bath & Beyond, and they’ll likely tell you that
they never shop there without a stack of 20-percent-off or 5-dollar-off coupons in hand.
As one reporter put it: “Shopping with a coupon at Bed Bath & Beyond has begun to feel
like a given instead of like a special treat, and that’s bad news for the chain’s bottom line.”
In fact, greater recent coupon redemption rates have increasingly eaten into the retailer’s
profit margins. 11
Geographical pricing
Setting prices for customers located in
different parts of the country or world.
FOB-origin pricing
Pricing in which goods are placed free on
board a carrier; the customer pays the
freight from the factory to the destination.
Uniform-delivered pricing
Pricing in which the company charges the
same price plus freight to all customers,
regardless of their location.
Zone pricing
Pricing in which the company sets up two
or more zones. All customers within a
zone pay the same total price; the more
distant the zone, the higher the price.
Basing-point pricing
Pricing in which the seller designates
some city as a basing point and charges
all customers the freight cost from that
city to the customer.
Freight-absorption pricing
Pricing in which the seller absorbs all or
part of the freight charges in order to get
the desired business.
Geographical Pricing
A company also must decide how to price its products for customers located in different
parts of the United States or the world. Should the company risk losing the business of
more-distant customers by charging them higher prices to cover the higher shipping
costs? Or should the company charge all customers the same prices regardless of location?
We will look at five geographical pricing strategies for the following hypothetical
situation:
The Peerless Paper Company is located in Atlanta, Georgia, and sells paper products to customers
all over the United States. The cost of freight is high and affects the companies from which
customers buy their paper. Peerless wants to establish a geographical pricing policy. It is trying
to determine how to price a $10,000 order to three specific customers: Customer A (Atlanta),
Customer B (Bloomington, Indiana), and Customer C (Compton, California).
One option is for Peerless to ask each customer to pay the shipping cost from the
Atlanta factory to the customer’s location. All three customers would pay the same factory
price of $10,000, with Customer A paying, say, $100 for shipping; Customer B, $150;
and Customer C, $250. Called FOB-origin pricing, this practice means that the goods are
placed free on board (hence, FOB) a carrier. At that point, the title and responsibility pass to
the customer, who pays the freight from the factory to the destination. Because each customer
picks up its own cost, supporters of FOB pricing feel that this is the fairest way to
assess freight charges. The disadvantage, however, is that Peerless will be a high-cost firm
to distant customers.
Uniform-delivered pricing is the opposite of FOB pricing. Here, the company
charges the same price plus freight to all customers, regardless of their location. The freight
charge is set at the average freight cost. Suppose this is $150. Uniform-delivered pricing
therefore results in a higher charge to the Atlanta customer (who pays $150 freight instead
of $100) and a lower charge to the Compton customer (who pays $150 instead of $250).
Although the Atlanta customer would prefer to buy paper from another local paper company
that uses FOB-origin pricing, Peerless has a better chance of capturing the California
customer.
Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The
company sets up two or more zones. All customers within a given zone pay a single total
price; the more distant the zone, the higher the price. For example, Peerless might set up an
East Zone and charge $100 freight to all customers in this zone, a Midwest Zone in which it
charges $150, and a West Zone in which it charges $250. In this way, the customers within a
given price zone receive no price advantage from the company. For example, customers in
Atlanta and Boston pay the same total price to Peerless. The complaint, however, is that the
Atlanta customer is paying part of the Boston customer’s freight cost.
Using basing-point pricing, the seller selects a given city as a “basing point” and
charges all customers the freight cost from that city to the customer location, regardless
of the city from which the goods are actually shipped. For example, Peerless might set
Chicago as the basing point and charge all customers $10,000 plus the freight from Chicago
to their locations. This means that an Atlanta customer pays the freight cost from Chicago
to Atlanta, even though the goods may be shipped from Atlanta. If all sellers used the same
basing-point city, delivered prices would be the same for all customers, and price competition
would be eliminated.
Finally, the seller who is anxious to do business with a certain customer or geographical
area might use freight-absorption pricing. Using this strategy, the seller absorbs all
or part of the actual freight charges to get the desired business. The seller might reason that
if it can get more business, its average costs will decrease and more than compensate for its
extra freight cost. Freight-absorption pricing is used for market penetration and to hold on
to increasingly competitive markets.